“Well, no. Technically this is more like an American
Express card. It looks just like a credit card, but I have
to pay the full balance immediately every time I use it.
There’s no credit line attached to it, and it doesn’t let me
borrow. But I like to pretend it’s a real credit card.”

Suzy sighs. “You have this AmEx-like card, and you call it
your Social Security Card, right?” asks Suzy.

“Right,” says Billy. “And once a year I figure out how my
Social Security financial picture looks, and I issue a report I
call the Social
Security Trustees Report. Today is that day.”

Suzy shakes her head. “And you’re smiling. I was
afraid of this. Let me review the situation to make sure I
understand it.”

“You typically get an allowance from Mom and Dad of about $18,000
per year. That’s money that the rest of us in the family
don’t get to spend, it’s all for your purposes. You
typically spend more than your allowance, about $20,000 per year,
and you’ve been gradually accumulating credit card debt (on a
real credit card that lets you borrow money from others).
Lately you’ve been spending much more – like $25,000 this year
and running up a huge amount of new credit card debt. Two
days ago we looked at you lobbying Mom
and Dad to allow your allowance to increase by about $500 per
year on January 1st. I complained because that’s $500
less each year for the rest of the family.”

“Right, but you’re an irresponsible little sister who won’t let
me have a bigger allowance when I have this enormous credit card
debt.”

“Yes, but you have a bad habit of taking your allowance increases
and spending them, as you did with that health care thing.
But let’s not rehash Tuesday’s argument. As I understand
it, you have two expensive spending habits, both centered on your
iPhone: you spend a lot of money buying both music and
movies. For some reason that I don’t understand, you call
the music ‘Social Security,’ and the movies you call ‘Medicare.’”

“These two spending habits are growing rapidly. This year
you’ll spend $4,800 on ‘Social Security’ music, and another
$3,600 on ‘Medicare’ movies.”

“So far, so good,” says Billy.

“Right. And you always charge the music you buy to your
‘Social Security Card,’ and you charge the movies to your
‘Medicare Card.’ But these aren’t real credit cards that
let you borrow. They work like American Express cards that
require you to pay the full balance as soon as you incur the
cost.”

“Now of the $18,000 per year that you get in total allowance from
Mom and Dad, some of that is for specific chores that you
do. This year about $4,400 of that $18,000 total allowance
is compensation for mowing the lawn, and you dedicate
that portion of your allowance to your Social Security music
spending. You call that your Social Security payroll
tax allowance.”

“Uh huh.”

“And this year another $1,200 or so of that $18,000 annual
allowance is compensation for shoveling the snow off the
driveway. You dedicate that portion of your
allowance to buying Medicare movies. You call that your
Medicare payroll tax allowance.”

“Doin’ great, sis.”

“Thanks. Now today let’s focus just on Social
Security. Since this card doesn’t actually let you borrow,
you have to immediately find the cash you need when you buy
Social Security music. This year you will spend $4,800 on
Social Security music. You’ll take the $4,400 of dedicated
Social Security payroll tax allowance you got because you mowed
the lawn, and use that to pay for most of the music. That’s
real cash you’re spending. But you need to find another
$400 of cash to pay for the rest of the Social Security music
costs incurred this year. That $400 comes from the rest of
your allowance, from money not for any particular chore and not
dedicated to any particular purpose. We can call that big
stream of allowance money from which the additional $400 per year
comes your general revenue allowance.”

“Keep going.”

“You project your future music spending will grow faster than
your lawn mowing dedicated revenues, so next year you’ll take
more than $400 from your general revenue allowance to close the
gap between your Social Security payroll tax allowance and your
Social Security spending.”

“Right, but it wasn’t always like this,” says Billy. “I
used to buy less music, so I was actually making more in
dedicated Social Security payroll tax allowance from mowing lawns
than I spent on Social Security music.”

“And in past years what did you do with the extra money you made
from lawn mowing that you didn’t spend on music? What did
you do with that money that was supposed to be dedicated for
Social Security spending?”

“Well, I carefully kept track of how much extra I made in Social
Security payroll tax allowance that I didn’t spend on Social
Security, and I wrote down those amounts on this piece of
paper. I call this piece of paper my Social Security
Trust Fund. Today I’m issuing my Social
Security Trustees’ Report, which shows that I have a balance
of $17,400 in my Social Security Trust Fund. I do the same
thing for Medicare, sort of. That’s actually a bit more
complicated.”

Suzy looks quite puzzled. “This is messy enough, so today
let’s stick to just Social Security. You kept track of past
Social Security payroll tax allowance that you didn’t spend on
Social Security music, and that has accumulated to $17,400.”

Billy, “Well, actually, less than that, but I gave myself credit
for interest.”

Now Suzy looks worried. “You gave yourself credit for
interest. But I’m confused. What did you do with the
actual money in those past years?”

“What money?” Billy asks.

“The portion of your allowance that resulted from your
lawn-mowing that in past years you didn’t spend on music.
Your extra Social Security payroll tax allowance. Where did
the cash go?” asks Suzy.

“Well … I … um …” Billy stutters. “I spent it on other
stuff.”

Suzy shakes her head. “Like what?”

“Oh you know, everything. I spent it on boxing lessons so I
could defend myself, and I bought an awesome Trapper
Keeper notebook with it. I bought a new bike for
transportation, and I spent some of it going to museums and
movies and parks. I even spent some on my online farm…”

“OK, stop, stop. You’re telling me you spent on other
things the extra allowance that in the past you had dedicated to
spend on Social Security music, but you also wrote down those
amounts on this Trust Fund paper and said that it should go to
future spending on Social Security music. This piece of
paper you call a Social Security Trust Fund isn’t actually
money. It’s just an accounting convention you created to
keep track of how much of those past dedicated Social Security
payroll allowance dollars you didn’t spend on Social Security,
but you did spend on other things.”

“Plus interest,” adds Billy, nodding.

“Plus interest,” sighs Suzy. “But this is interest you’re
crediting on non-existent money. Now that your Social
Security music spending has increased, each year you’re spending
all your dedicated Social Security allowance on Social Security
music, and you’re tapping into your general allowance to pay for
the rest of your Social Security costs. You’re also
subtracting this general allowance contribution from the
‘balance’ on your ‘Social Security Trust Fund’ piece of paper,
even though there’s no real cash involved here. Subtracting
from this so-called Trust Fund balance is pure optics, just like
adding to that balance was in the past when you were spending the
extra cash for other purposes.”

“Riiiiiiight. Why does that matter?” asks Suzy. “That
piece of paper that you call a Trust Fund has no actual resources
behind it. There’s no money there.”

“But it shows how much I should be able to draw from my future
general allowance to spend on Social Security music, above and
beyond my dedicated Social Security payroll tax allowance from
mowing the lawn!”

“You can tell yourself that, but where does the money come
from? You can make whatever promise you want about how much
you will spend on music in the future, but the cash is going to
have to come from somewhere. In fact, you’re taking $400
away from other needs just this year to pay for this year’s
Social Security music spending.”

“Let me ask you this,” continues Suzy. “Suppose we doubled
that number on your piece of paper. Suppose we just cross
out the $17,400 balance on your so-called Social Security Trust
Fund, and instead we write in $35,000. We’ll round up.”

Billy says eagerly, “Suzy, that’s fantastic! Now I won’t run out
of money for music spending any time soon! With $3,500 in
my Social Security Trust Fund, it will take decades to draw down
that balance.”

“That’s exactly what worries me,” replies Suzy. “We haven’t
actually created any more money by doing this. We have just
changed an accounting balance for an imaginary account. You
can tell yourself that you have more money to spend on Social
Security music, but you don’t actually have any more cash, now or
in the future. It’s not like a bank account balance, or
even like the real credit card debt you have been
accumulating. I’m really worried that this Trust Fund
balance and your Trust Fund reports are giving you a false sense
of security, and they are preventing you from taking a hard look
at how much you spend each year on Social Security music.”

“You don’t have enough dedicated allowance this year to pay for your
Social Security music spending this year. You have an
immediate cash flow problem, in that you’re having to sacrifice
$400 of other stuff just this year to make up the difference
between what you collect in dedicated Social Security payroll tax
allowance, and what you spend on Social Security. And that
$400 gap will be bigger next year, and the year after that.”

“Billy, this is a problem for you right now. You need to
slow the growth of your Social Security music spending.
When you combine that with your spending on movies that you call
Medicare, over time it’s going to grow to consume most of your
$18,000 annual allowance. It will squeeze out your ability
to spend your general revenue allowance on those boxing lessons,
those school supplies, those museums and movies and parks and
even your online farm.”

“You forget, sis,” says Billy with a grin. “While this
Social Security Card isn’t a real credit card, I do have a real
credit card. I can just borrow the extra money I need and
run a bigger deficit this year. I promised myself I’d spend
this $17,400 on Social Security music over time, and I can’t
break that promise. I’ll just keep increasing my borrowing
on my real credit card to do so.”

“And next year, and the year after that, …” cries Suzy.

“Yep. I plan to increase my spending each year on Social
Security music. I’ll draw more from my general fund
allowance to pay that which is not covered by my dedicated Social
Security payroll tax allowance. If that threatens to
constrain my other spending, I’ll just borrow and run up my
credit card debt.”

“But there’s no money there. And if you keep telling
yourself you’re OK for another 27 years, you’re not going to do
anything about the real problem, which is that you can’t afford
this growth rate of your Social Security spending. At some
point this cash flow problem is going to cause your real credit
card debt to get so high that you’ll bump against your credit
limit. Then your only options will be to drastically cut
back on your Social Security spending, or slash the amount your
spend on other stuff, or …”

Suzy gasps. “Oh, no. Or you’ll wait until it’s too
late, and then demand a bigger allowance, leaving even less money
for the rest of the family.”